A recent decision by the Ontario Court of Appeal affirming a decision of the Ontario Superior Court has provided comfort in that carefully drafted benefit provisions can exclude the value of any grow-in benefits that may be triggered in the event of an employee termination under the Ontario Pension Benefits Act (PBA) in calculating benefits payable under a supplemental pension arrangement.

A restructuring of Shoppers triggered a partial wind-up of the registered pension plan and grow-in benefits under section 74 of the PBA to those terminated as a result of the restructuring. (We note that the restructuring pre-dated amendments to the PBA removing partial wind-ups; the PBA now in effect extends grow-in benefits to any employee who meets the age and service qualification requirements and is terminated without cause.) Owing to the enhanced early retirement benefits of the Shoppers plan, the grow-in benefits were, in many cases, quite significant and provided benefits to plan members that exceeded the aggregate benefits that would have been paid to the members under the Registered Plan and Supplementary Plan had the grow-in benefits not applied.

Shoppers argued that the Supplementary Plan benefit excluded any grow-in provisions under provincial legislation, and by subtracting the grow-in amounts provided by the Registered Plan, the Supplementary Plan benefits (according to the formula for calculating the supplementary benefit) were in some cases negative, with no benefit owing under the Supplementary Plan as a result. Shoppers’ interpretation of the Supplementary Plan was contested by the applicants in the litigation, who were included in the partial wind-up group and denied enhanced Supplementary Plan benefits.

The case serves as a reminder of the importance of carefully drafting the benefit provisions in supplemental plan texts where members of the underlying registered plan are subject to pension legislation that provides for grow-in benefits on termination of employment.

Despite conflicting actuarial evidence regarding the reasonable interpretations of the Supplementary Plan benefit provisions, the Superior Court found that it was clear that the Supplementary Plan was intended to top-up the Registered Plan benefits impaired by the ITA limits when considering the entirety of the Registered Plan and Supplementary Plan. The Supplementary Plan was not, however, intended to provide benefits in excess of statutory benefits created by provincial grow-in rules. The Court determined that Shoppers had correctly interpreted the Supplementary Plan by calculating the supplemental benefit as the benefit that would have been paid from the Registered Plan but for the ITA limits and disregarding any grow-in benefits, less the benefit actually paid from the Registered Plan (including grow-in benefits imposed by statute). The applicants’ claim was therefore dismissed.

The applicants appealed that decision to the Ontario Court of Appeal. The appeal was denied on the grounds that the Superior Court judge’s interpretation was reasonable as it: (1) correctly applied principles of contractual interpretation; (2) was alert to Shoppers’ exclusive right reserved under the Supplementary Plan text to interpret the Supplementary Plan and make conclusive determinations with respect to benefit entitlements; (3) was supported by the Supplementary Plan text; and (4) in the face of conflicting actuarial testimony, reasonably accepted the testimony of the administrator’s actuary. The Court of Appeal also upheld the verdict of the lower court, which stated that the applicants’ costs of litigation were not properly payable from the Registered Plan fund, notwithstanding the applicants’ contention that the litigation involved the interplay of the Registered Plan and Supplementary Plan texts and had conceivable application to a broader class of Registered Plan members.

The case serves as a reminder of the importance of carefully drafting the benefit provisions in supplemental plan texts where members of the underlying registered plan are subject to pension legislation that provides for grow-in benefits on termination of employment. Given the reasonableness standard applied by the Court of Appeal, an opposite determination by the lower court regarding the proper interpretation of the benefit provisions may well also have been upheld, stressing again the importance of careful drafting. By explicitly excluding grow-in benefits from the supplemental plan benefit calculation (while including such benefits in calculating the benefit payable from the underlying registered plan), administrators can significantly reduce the cost of (typically unfunded) supplemental benefits while managing litigation risk.